The most junior investors in US Collateralized Loan Obligation (CLO) funds will try to boost their flagging returns by forcing managers into expensive refinancings. Managers that do not co-operate may have their fees cut or lose control of their funds in the worst case scenario, souces said. Equity holders are getting ready to play hardball as their returns have been eroded by a repricing wave that saw a record US$195.8bn of US leveraged loans refinanced in the first quarter alone, according to Thomson Reuters LPC data.

Now expectations of rising US interest rates are propelling demand for the high-yielding assets far beyond available supply. Total returns for leveraged loans hit a four-year high of 8.82% this year through November 29, compared with -0.69% in 2015, the index shows. "A return of this magnitude cannot occur without a preceding sell-off," said Joseph Lynch, senior portfolio manager, non-investment grade credit, at Neuberger Berman.